Tuesday, 4 October 2011

Eurozone fears batter world stocks

Global equities have hit a fresh trough for the year as traders just can’t junk their eurozone funk. Not even recent US data suggesting the economic outlook is not as dire as many had feared can break the cycle of woe, with fresh concerns about the health of the European banking sector piling on the stress.
The FTSE All-World index is down 1.9 per cent and industrial commodities are again under pressure, with copper off 1.4 per cent to $3.10 a pound.
Wall Street’s S&P 500 has opened down another 1.2 per cent following Monday’s 2.9 per cent slump. This takes the US benchmark into bear market territory, it having lost more than 20 per cent since May’s cyclical peak.
Perceived havens are stronger, with 10-year Bund yields tumbling 12 basis points to flirt with record lows at 1.70 per cent.
Forex is not adhering to the broad “risk off” mood, however, with the euro up 0.2 per cent to $1.3202 and the dollar index down 0.1 per cent. Neither is gold performing in the way many argue it is supposed to, the yellow metal losing 0.3 per cent to $1,651 an ounce even as anxiety abounds.
The All-World is at its lowest level since July 2010, taking its losses since May’s cyclical high to 25 per cent. Much of the reason for this slump has been fears that the eurozone authorities are unable to contain the bloc’s sovereign debt crisis and that a messy Greek default will roil the financial system, dislocating the economy.
Those worries are most definitely to the fore on Tuesday. Banks stocks are falling on worries about exposure to the eurozone crisis and credit default swap gauges covering the US and European financial sector have widened markedly. The FTSE Eurofirst 300 is suffering a fall of 2.8 per cent as the banking sub-index loses 4.6 per cent.
Dexia is the latest bank to deliver severe conniptions to investors, as worries about its solvency see the stock slump more than 30 per cent at one point. This has been followed up by a profit warning from Deutsche Bank, whose shares are down 6 per cent after it said it was going to take an approximately €250m impairment charge on its Greek sovereign debt holdings.
There is little on Tuesday to comfort investors in that regard as official talks about dealing with the crisis go on in Luxembourg and as Athens, and the markets, are left waiting for confirmation that Greece will receive the next tranche of bail-out funds as it struggles to hit deficit reduction targets.
And what markets don’t need right now is the prospect of a trade war between the world’s two biggest economies. But China has warned that is what may occur if Washington passes an anti-China currency bill.
The febrile atmosphere and pervading uncertainty has encouraged increasing numbers of investors to push funds into operations targeting “Black Swan” events.
Despite all the gloom, bulls have welcomed recent evidence that the US economy is not looking like falling into a double-dip recession and this may be behind S&P 500 futures initially curbing their losses. But it wasn’t to last. Perhaps Federal Reserve chairman Ben Bernanke can soothe the markets when he testifies before Congress about the economic outlook, later on Tuesday.
Earlier, Asian shares extended losses with the FTSE Asia-Pacific index dropping 2.2 per cent. South Korea’s Kospi Composite index lost 3.6 per cent having at one point shed more than 6 per cent on heavy foreign selling as the market played catch-up after a public holiday on Monday.
Hong Kong’s Hang Seng index continued to lose ground, its 3.4 per cent fall taking the benchmark to its lowest level since May 2009. It has now lost a third of its value since April’s high point. China’s market was closed for a holiday and will remain shut for the rest of this week.
Australia’s S&P/ASX 200 index was a relative outperformer, falling just 0.6 per cent as traders reckoned comments from the Reserve Bank of Australia meant an interest rate cut could be on the cards as early as next month. This weakened the Australian dollar, however, and it is down 0.8 per cent to a one-year low of $0.9441, also suffering on concerns that China’s economy may falter.
Trading Post.
A busy week of central bank and economic data action may provide the ammunition for sterling to break out decisively from range-bound trading versus the euro.
The pound sits below 86p versus the single currency as the euro continues to be dogged by the eurozone’s fiscal worries and after two-year Bund yields shed up to 80 basis points of premium versus gilts in two months.
Further pound propulsion came from news on Monday that while the eurozone manufacturing sector was contracting in September, UK peers saw activity expand.
This damped expectations that the Bank of England will announce more quantitative easing after its monetary policy meeting on Thursday. In contrast, some in the market reckon European Central Bank president Jean-Claude Trichet will bid adieu by cutting interest rates just 45 minutes later.
Before that, however, traders will have to tackle Wednesday’s national and regional purchasing managers’ surveys on the service sector.
Should the UK deliver a relatively better performance than forecast, then technical analysts could be calling for next stop 84p for €/£ cross. It is currently 85.84p.

By Jamie Chisholm taken from http://www.ft.com/cms/s/0/62324df4-ed7c-11e0-a9a9-00144feab49a.html#axzz1Zp0jEV2R

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